If you’ve ever read about saving or investment strategies, then you’ve probably heard the phrase “pay yourself first.” Paying yourself first is one of the more popular savings methods that involves prioritizing your savings accounts before using your paycheck for necessities such as bills, rent, and other costs. It’s a great mentality to have – especially if one of your long-term goals is to have a healthy financial future. With the “pay yourself first” strategy, you not only develop strong savings habits, but you also set yourself up with a large safety net of savings that can push you closer to financial freedom.

Why Is It Important to Pay Yourself First?

 As previously mentioned, one of the major benefits to paying yourself first is that it can help with your long-term financial health. Even small monthly contributions from your paycheck to your savings account can eventually add up over years of paying yourself first. Especially if you continue to increase those contributions as your income grows, you might find that within a few years you have a large amount of savings to rely on for the future.

The other benefit of paying yourself first is that it encourages you to make those contributions rather than ignore the importance of savings. While it might be tempting to spend your extra cash or that holiday bonus, the pay yourself first strategy ensures that you don’t skip out on your savings contributions each time you’ve got a paycheck in hand. After all, your savings can’t grow unless you remember to put some money aside for them.

What Should You Save For?

  • Emergency Fund
    Let’s be honest. No matter how much you plan for the future, emergencies can happen, leading to some potentially large and unexpected costs. That’s where having a large safety net of savings can come in handy. An emergency fund is a savings method where you can make regular contributions to the fund but refuse to spend it unless you’re in need of car or home repairs, hospital trips, or other emergencies. The goal is to eventually have enough money in the fund to cover six months’ worth of your income. That way when life throws an emergency your way, you won’t have to worry about whether you have the finances to handle it.
  • Large Purchases
    Say you want to buy a house or a car, or go on the trip of a lifetime. All those things are going to cost a lot of money – more money than one paycheck will likely cover. However, if you calculate how much money you need to save, set a deadline, and create a budget that allows you to contribute a set amount to your savings, then you will be able to generate enough money in your savings account to cover the cost of your next big purchase.
  • Retirement
    When people say that paying yourself first is an investment strategy, they mean that by paying yourself first, you’re investing in yourself and your future. One of the best ways to save for the future is by making contributions toward retirement. There are many options for retirement savings accounts such as an IRA or a 401k that’s available through your workplace. If your workplace also offers to match contributions, then this can be an especially beneficial way to generate a large amount of funds that will keep you financially strong in retirement.

How to Get Started

  • Set a Specific Savings Amount
    If you have a specific savings goal in mind, then it’s good to also have a specific amount you’re saving for. With a specific amount in mind, you can create a timeline for when you want to achieve your savings goal and what milestones you’d like to meet along the way. From here, you can start budgeting toward those savings by ensuring that you’re contributing enough each month to meet those milestones.
  • Review and Adjust Budget
    If you aren’t making as much progress as you’d like to, then consider adjusting your budget. The best way to do so is by reviewing your expenses and cutting out any unnecessary spending. By removing the costs that you feel you can live without, then you’re able to free up more money for savings.
  • Set Up Automatic Transfers
    As you now know, the most important part of paying yourself first is to make sure your money is contributed to a savings account before it is spent on anything else. However, if you’re still worried that you might forget to set aside money for savings or you think you’ll be tempted to spend your paycheck right away, then you could consider automatic transfers. With an automatic savings transfer in place, it can take away the risk of skipping a savings contribution once payday hits. As a result, you can rest assured that your contribution has been taken care of each month – even if it slips your mind.

Summary

No matter how much you’re saving or what you’re saving for, paying yourself first is a great strategy for building up your savings account and creating healthy financial habits. While it might be easy to focus on the present and use your paycheck to take care of what’s right in front of you, you should never forget about the future. With savings as a priority, you’ll be one step closer to living worry-free as you set yourself up for financial success down the line.